Updates, commentaries, and the like about the Philippine Real Estate Sector

POGOs

Published: August 23, 2019

Philippine Offshore Gaming Operations (POGOs) have been in the headlines the past to a rising crescendo. Many articles have been written recently about the suddenly significant presence of both legal and illegal Chinese workers in the country, the freezing of applications for new POGO licenses, the request of the Chinese government for our government to ban gambling, and the curtailment of POGO operations to hubs. More recently major local banks and property developers have come out with press releases that they have limited exposure to this market. These headlines have resulted in dire predictions about the negative impact of all these events to the local real estate market.

This article will try to explain what POGOs are and how they impact our economy.

A short history on POGOs

Chinese nationals are big gamblers. Casino operators in Las Vegas saw an opportunity to tap this market when Macau loosened its restrictions on foreign operators in 2002. In just a few years, new casinos sprouted as foreign investors came in droves. By 2013, Macau’s gambling revenues grew seven times bigger than Las Vegas’.¹

Xi Jinping saw gambling as a threat to China’s economic progress as he thought that government officials used gambling as means to launder ill-gotten wealth. Not long after Xi took office as China’s President in 2012, he launched an unprecedented anti-corruption campaign, cracking down particularly on Macau casinos. Macau’s gambling revenues started to decline in 2014 and have continued to fall ever since.²

As China enforced new laws to prevent Chinese nationals from gambling in Macau, gamblers moved to other locations such as the Philippines. Casinos started to be built in the Philippines, particularly in the Bay Area: Solaire in 2015, City of Dreams in 2016, and Okada Manila in 2017.

In 2016, POGO operations began when PAGCOR started to award e-casino and sports betting licenses. A year later, POGO operations in Metro Manila boomed, leasing as much as 312,000 sqm of office space in Metro Manila the fourth quarter of 2017 (vs. just 80,000 for the full year of 2016).³

POGO Operations

The POGO employees you see here are basically marketing agents and tech support specialists–all to serve a Mandarin-speaking clientele. Most have the job of identifying and contacting China-domiciled gamblers and lure them to playing card, lottery, and other casino games online. They use cameras and headsets to communicate with gamblers watching from abroad. The tech support teams are present to make sure everything goes moves smoothly. Buy-ins can go as high as US$3 Mn per operator per day.⁴

Certain articles have likened POGO employment to modern day slavery. According to these reports, POGO employees left their factory jobs in provincial China in plight to escape poverty. They were promised salaries of as much as US$2,800 per month, but after deducting several fees charged by their recruiters, only took home US$1,000.⁵ They work 6 days a week, 12 hours a day–longer than what they were used to back home. They’re picked up from and dropped off to their assigned living spaces daily, and are prohibited from traveling outside of Manila. Some say that employees who didn’t hit their quotas were beaten up. Sadly, a number of them want to go back to their country but cannot, either in fear of being prosecuted or because their recruiters wouldn’t allow them to.⁶ If you think about it, their story resembles our OFWs’.

I think the reason why they’re so unruly is because they don’t know any better. These people are factory workers in the provinces, unaccustomed to “Western etiquette”. I’ve heard of stories where a Chinese, who upon arriving here, saw an elevator for the first time and happily rode it up and down repeatedly; or a group of Chinese, in excitement of seeing a swimming pool, jumped-in in their underwear.

POGO Operators vs. Chinese Buyers

We need to distinguish between POGO Operators and Chinese property buyers. POGO operators are interested in leasing property either for office premises or housing for their employees. On the other hand, there are Chinese nationals engaged in buying pre-selling properties.

POGO operators are completely aware of the legal risks involved in their line of work and are aware of the possibility of stopping operations in a snap. They have to be ready to pack up quickly and (possibly) run to the next possible location for operations. They rent houses, condo units, and dorms to house their employees. They prefer older condo units with larger cuts and whose association rules are not too strict with the number of occupants.

Unlike what most people think, they are really quite stingy when it comes to pricing. Yes, they’re willing to pay as much as 150% premium over the usual rate for houses and residential condos, but this is because they will pack their employees like sardines into these properties, making their effective cost of lodging space per employee quite small. They pay 12 months in advance and in cash because they like try to avoid creating a paper trail by not opening checking accounts. They’re also known to sometimes suddenly vacate rented space without informing their lessors.⁷

POGO employees simply do not have the financial capacity to buy properties.

On the other hand, the Chinese buying pre-selling condo units are mostly Mainland speculators, who intend to flip or rent these out to the growing Chinese population as soon as they are turned over. They buy low to mid-end priced condos, and choose the lightest payment terms possible. And just like POGO operators, they’re very particular about pricing.

People attribute rising real estate prices in Metro Manila to POGOs, which isn’t exactly true. When reports claim that POGO operations have pushed real estate prices, I believe they’re referring to commercial land prices in Pasay (particularly the Bay Area), where prices have increased by as much as 21% annually since 2009.⁸ The rise in real estate prices in CBDs like Makati, BGC, Pasig are driven by something else. (I’ll tackle this in another article.)

Inherent risks of POGOs

Since June of this year, Chinese government emissaries have been vocal against online gambling operations in neighboring countries. These countries responded immediately with: Vietnam arresting more than 380 Chinese nationals for operating an illegal gambling rings (July)⁹; Cambodia completely banning online gambling (August)¹⁰; and the Philippines halting the issuance of new POGO licenses (August)¹¹. While the Chinese government applauded the Philippine government’s move, they still demanded that all online gambling be stopped.

If POGO operations suddenly stop or moved to the planned hubs in Cavite or Clark, the “BPO-office space segment” will be the most affected. (Note that we have to differentiate “BPO-office space segment” from the “traditional office space segment” since most traditional office buildings do not allow 24/7 operations.)

To give an idea on how much space we’re talking about, in the first half of 2019, gaming companies occupied 374,000 sqm of office space in Metro Manila, representing 37% of the total office space leased.¹² Thus office rental rates of “BPO-office buildings” will nosedive with any adverse development in POGOs. In fact, publicly traded leasing firms have recently released statements as to how much of their revenues are traced from the gaming segment. This is to allay fears that their stock prices will also be negatively impacted by negative developments. In fact, the stock price of Megaworld, the largest office lessor to this group, dropped 8.51% on August 22, 2019.

The rental market for residential properties will likewise be negatively affected. Assuming that most of the 733,769 Chinese nationals¹³ who entered the Philippines are POGO employees, and if each of them was allotted 10 sqm of living space, this means that we’re talking as much as 73,377 sqm of residential space that will be vacated. This event will likely be isolated to a handful of condos where staff housing is prominent (i.e. older condos in Salcedo and similar areas popular for POGO housing).

DISCLAIMER: This material, which is strictly for information purposes only. The views and opinions expressed in this article are those of Juan Patag’s and do not necessarily reflect the position of RE/MAX Capital, or of any other RE/MAX franchise. Any information is subject to change without prior notice. No liability whatsoever is accepted for any loss that may arise (whether direct or consequential) from any use of the information contained herein. Information Each RE/MAX franchise is independently owned and operated.